LCH Gets Approval to Clear CDS for European Investors

July 19 (Bloomberg) -- LCH.Clearnet Group Ltd. said it
obtained regulatory permission in France to clear credit-default
swaps index trades in Europe for investors, the first time they
can clear the derivatives.

The clearinghouse, based in Paris, also expects to back
single-name credit-default swaps “soon,” Charlie Longden,
chief executive officer of LCH’s CDSClear, said in an interview
today. The service will start testing with clients and expects
to start this quarter, he added. LCH.Clearnet SA is a unit of
London-based LCH.Clearnet Group Ltd.

The U.S. Dodd-Frank Act requires clearing for most swap
contracts, while international regulations under the Basel III
accords encourage the use of clearinghouses for the derivatives
through favorable capital treatments. The European Commission is
also working on legislation, called the European Market
Infrastructure Regulation, that would govern most aspects of
clearing.

“The market has been looking for a European CDS clearing
solution for some time now,” Barry Hadingham, head of
derivatives and counterparty risk at Aviva Investors, said in an
e-mailed statement. “We are particularly pleased to see that
the solution offers improved portability conditions and easy to
navigate legal arrangements.”

Clearinghouses operate as central counterparties for every
buy and sell order executed by their members, who post
collateral, reducing the threat from a trader’s default.

FX Swaps

The index-clearing service will offer European funds so-called asset tagging, Longden said. Asset Tagging allows members
of the clearinghouse to track which of their fund manager-related non-cash collateral and positions can be transferred, or
ported, to another member if there’s a default. The index-clearing service also simplifies the legal documentation process
between fund managers and the clearing members, who are
typically banks and brokers.

The “service is mainly for the non U.S. buyside,”
Malavika Solanki, head of business development, sales and
marketing at CDSClear, said in an interview. “We’ve been
talking with a wide variety of clients for the better part of a
year -- all the traditional buyside institutions and also a
number of regional banks who are examining whether client
clearing suits them. Until the rulebook was approved it wasn’t
real to the market. Now it sets in stone the exact procedures
and policies so it’s no longer just a conversation. It’s not
just conceptual.”

World’s Largest

LCH, now majority-owned by London Stock Exchange Group Plc,
operates CDSClear and also offers a service to process foreign-exchange swaps. Further, it is the world’s largest interest-rate-swap clearinghouse. The company in February 2012 appointed
David Weisbrod, who spent 40 years at JPMorgan Chase & Co., to
head its U.S. unit.

The world’s largest swaps dealers including JPMorgan,
Deutsche Bank AG and Barclays Plc are moving much of the $23.5
trillion privately negotiated credit-derivatives market to
clearinghouses to reduce the risk of a counterparty failing.

“This is the first time European clients are able to clear
CDS in Europe,” LCH’s Longden said in the interview. “This
service was built to create competition in the market. We’ve
been clearing CDS for a year and the idea is to broaden the
service. We are now engaging with a lot of clients, engaging
with a lot of clearing brokers. People do want to get ready is
the message.”